An ESOP is a very flexible instrument that uses tax-deductible or “tax-free” dollars to achieve a variety of corporate objectives, as outlined below:

  • Provide a market (at fair-market value) for partial or complete sale by existing shareholders with a “tax-free rollover” treatment if ESOP ownership is 30% or greater.
  • Make tax-deductible contributions and loan principal and interest payments via the ESOP. (Professional Service Companies make reimbursable contributions and loan payments.)
  • Provide for the acquisition or divestiture of a company or division using pre-tax funds.
  • S corporation stock owned by an ESOP is not subject to federal tax.
  • Allow tax deduction for dividends paid to employees or used to repay ESOP debt.
  • Convert an existing profit sharing (or money purchase) plan into an ESOP, whereby the funds can be made available for the purchase of new company shares and/or existing stock.
  • Raise working capital by selling newly-issued stock to a leveraged ESOP, or refinance existing debt by contributing stock to the ESOP and deducting the full value of the contribution.
  • Recapture up to 2 years of prior paid federal taxes.
  • Other applications include privatization, perpetuation, an IPO alternative, charitable giving, going private, and 401(k)/ESOP combination plans.